Einstein said once “Compound interest is the eighth wonder of the world. He who understands it, earns it ... he who doesn't ... pays it.”
Let’s take example of Mr. Early X and Mr. Late Y.
Mr Early X thought to start planning for his retirement on age of 25 and
started the 5000/ monthly SIP in Mutual Fund for next 15 years. While Mr Late Y
thing 25 is not a age to thing about retirement and its time to enjoy the life
but later stage Mr Late Y thing retirement planning is also very important and
Mr Late Y started 1000/monthly SIP for next 15 years.
So now here is the comparison between both of our Mr X and
Mr Y.
|
Mr Early X
|
Mr Late Y
|
Amount invested
|
5000*15*12 =9 lakhs
|
10000*15*12= 18lakhs
|
Investment Horizon
|
60-25= 35 years
|
60-35=25 years
|
At age of 60 Retirement Corpus
|
3.88* Cr
|
2.09* Cr
|
(Note* : Assuming the average of 14% return from MF Compounding basis. )
At age of 60 Mr Early X has 1.85 times more amount than Mr
Late Y with half of investment then Mr Late Y. It’s not how much you invest , it
how long you invest make a difference.
Let’s take well known example of Wipro's 10000 to 528Cr Journey.
Let’s
just assume that you bought 100 shares of Wipro each at a face value of Rs.100
in the year 1980. Total investment: Rs.10,000. You don’t touch it at all, no
profit booking or buying more shares. Wipro has done various bonuses and stock
splits in its history of 1980-2014. Here is the list of all such corporate actions:
Wipro Investment growth
|
||
Year
|
Action
|
Number of Shares
|
1980
|
Initial
Investment
|
100
|
1981
|
1:1
Bonus
|
200
|
1985
|
1:1
Bonus
|
400
|
1986
|
Stock
split to FV Rs.10
|
4,000
|
1987
|
1:1
Bonus
|
8,000
|
1989
|
1:1
Bonus
|
16,000
|
1992
|
1:1
Bonus
|
32,000
|
1995
|
1:1
Bonus
|
64,000
|
1997
|
2:1
Bonus
|
1,92,000
|
1999
|
Stock
split to FV Rs.2
|
9,60,000
|
2004
|
2:1
Bonus
|
28,80,000
|
2005
|
1:1
Bonus
|
57,60,000
|
2010
|
2:3
Bonus
|
96,00,000
|
After the
year 2010, there were no more bonuses or stock splits. But with just that
initial investment of Rs.10,000 (100 shares) you now would end up with
96,00,000 shares of the company because of all the stock splits and bonus
shares. Current stock price of wipro is about Rs.550 per share,
as of 22 Jan, 2016.
INR 550 ×
96,00,000 = Rs.528 Cr. That is a CAGR (Compound Annual Growth Rate) of
47.39%. Does any of your bank FD give you 47% annual interest rate.
And we
are not even considering dividend pay-out here. Recent dividend declared was 5
per share which make 4.8 Cr as dividend and we have many dividends like this.
Just Amazing compounding is !!!
Mr Warren Buffet said it correct “Someone is sitting in the shade today
because someone planted a tree a long time ago.”
Be Smart. Invest Smartly
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